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GREENSBORO — The Eden community is still
waiting to learn the fate of Morehead Memorial Hospital after a judge recessed
until Monday a bankruptcy hearing on the hospital’s sale.

U.S. Bankruptcy Judge Benjamin Kahn adjourned
Wednesday’s hearing in a packed courtroom to allow attorneys to review
financial documents about the nonprofit hospital’s proposed sale to a
for-profit Miami partnership for more than $11 million.

Kahn also declined to give the UNC Health Care
system a few days to improve its losing cash offer of $500,000 and get back
into the bidding. UNC Health has offered $25,000 to assist Morehead with
operating expenses in exchange for time to make a better offer.

Kahn agreed with Morehead’s attorneys, who said
the winning bidder followed the rules of the Oct. 30 bankruptcy auction and
should be allowed to proceed.

Kahn adjourned the hearing after three hours of
testimony about the Eden hospital’s proposal to sell its assets to the Empower
iHCC partnership of Miami, Fla., for just over $11 million in cash, roughly
$300,000 more than it originally offered just a week ago.

The hearing was suspended as the chief
executive officer of Empower iHCC, Noel Mijares, was explaining the complex
financial arrangement under which a lender has guaranteed the $15 million
Empower will use to buy and operate the hospital and its buildings.

A creditors’ attorney in Morehead’s Chapter 11
case asked Mijares if his company could raise the money if the loan is reduced
or falls through.

A finance company has guaranteed to lend the
money to Empower if the hospital’s buildings appraise for their roughly $27
million tax value. Andrew Sherman, an attorney for the creditors in Morehead’s
Chapter 11 case asked how Empower could guarantee it would pay the $11.06 million
it has offered if the appraisal falls short and the lender reduces its loan.

Mijares said his company’s corporate partners
could make up the difference and attorneys began to offer financial documents
to support his answer. At that point, Kahn interrupted the hearing to give
attorneys time to review seven documents that were introduced in testimony.

The small courtroom in the U.S. Bankruptcy
Court for the Middle District of North Carolina was jammed with scores of
Morehead employees and Rockingham County officials. Many wore blue Morehead
Memorial Hospital T-shirts.

Kahn also overruled an objection filed by the
N.C. Attorney General’s Office asking for 30 days to review the agreement. He
said that the attorney general had plenty of time to file an objection before
the Nov. 2 deadline after the bidding process concluded more than a week ago
but that it waited until Monday to make that filing.

Special Deputy Attorney General Jennifer Harrod
told Kahn that the attorney general reviews all “substantial” transfers of
nonprofits, especially when they involve hospitals in rural areas being sold to
for-profit companies.

Harrod said the attorney general does not have
a problem with the terms of the deal but wants 30 days to review the case to
make sure the deal is best for such a rural community served by a hospital like
Morehead for decades.

Kahn said, however, that Nov. 2 was the
deadline for objections to the deal. But he added he shares the attorney
general’s concern over the hospital’s future under the for-profit partnership.

Morehead’s lead bankruptcy attorney, Thomas
Waldrep of Winston-Salem, spent the balance of the hearing presenting his
client’s case for the deal.

The U.S. Department of Housing and Urban
Development, a bankruptcy administrator and several major lenders had filed
objections to the decision to favor Empower.

In addition to the $11.06 million in cash, the
newly formed Empower iHCC partnership has offered $20 million in other
considerations and to collect roughly $10 million in accounts receivable for a
fee of 8 percent to raise more money for creditors. It is pledging to operate
the hospital for at least 10 years.

Waldrep called to the witness stand two
financial experts who have worked with Morehead in structuring the deal.

Michael Lane, a health care investment banker
with the Hammond Hanlon Camp banking firm, said the market for community
hospitals is good, with plenty of companies buying them in groups, but the
outlook for a small hospital like Morehead is not as strong, especially if it
is losing large amounts of money.

His firm contacted dozens of buyers interested
in adding the hospital to their groups or in simply placing a financial
investment with the hospital.

Under cross examination from Sherman he said he
had not been familiar with Empower but he was not surprised that an unknown
company placed a bid. Lane said Empower plans to set up the hospital’s
ownership under a “shell holding company” that currently has no assets. But he
said the company must guarantee it can supply the cash before the deal is consummated.

Lane said over 10 years the deal could
ultimately be worth $30 million to the hospital’s creditors.

Waldrep also called Scott Davis, a certified
public accountant whose specialty is distressed health care groups. He has
worked with Morehead since February.

Davis said Morehead cannot continue to operate
on its own without this deal. It is losing money, or “burning cash,” at the
rate of $450,000 a week, and it will soon run out, he said.

Under the sale, Davis said, creditors will
ultimately collect up to $27 million over several years. If the hospital
closes, the most creditors would get is $15.5 million.

Dana Weston, Morehead’s president and chief
executive officer, who was in the courtroom audience, said later that she has
learned not to be surprised by the twists and turns of the case.

“Bankruptcy is a process,” Weston said, “and
you have to let the process work.”

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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